Canadian bond yields are rallying, and that’s bad news for people looking for cheap mortgage debt. The Government of Canada (GoC) 5-Year bond yield surged higher on Wednesday. The yield on this bond influences 5-year fixed mortgage rates, but have yet to be priced in. The last time yields were at this level, mortgage rates were over 20% higher. That means we should expect mortgage rates to climb over the next few weeks, if not days.
Canada’s 5-Year Government Bond Yields Made A Big Daily Jump
The GoC 5-year bond yield ripped higher as plans to ease monetary stimulus were released. The yield closed at 1.43% on Wednesday, an absolutely huge climb of 9 basis points (pts) in a single day. Yields are now 32.96 bps higher than a month ago, and 105.56 bps higher than last year. They haven’t been at this level since January 2020, before the pandemic.
Government of Canada 5-Year Bond Yield
The percent yield of the Government of Canada’s 5-year bond.
Source: Bank of Canada; Better Dwelling.
GoC 5-Year Bond Yields Have Been Climbing Fast This Past Month
That might have been too data-filled to give context to how fast these yields are rising. Over the past month, more than a quarter (27%) of the current yield is from yesterday’s increase. Over the past year, nearly a third (31%) of the rise in yield is from increases over the past 30 days. Growth is accelerating very fast.
Canadian Mortgage Rates Are Likely To Bond Yields Within Days
A lot of messages are being sent by bond yields, but the most broadly felt one will be rising mortgage rates. The 5-year bond yield is strongly linked to uninsured 5-year fixed mortgage rates. As the 5-year bond yield climbs, so will mortgage rates. When it falls, so do mortgage rates. Super complicated, I know.
Mortgage rates have climbed, but they’re expected to go even higher over the next few weeks, if not days. A 5-year fixed mortgage rate is currently hovering around 2.00%, which is very cheap. The last time bond yields were at this level, mortgage rates were over 40 bps higher. The gap varies with the supply of credit, but it still would never be this big. Mortgages just haven’t had time to respond, since it’s been a quick climb.
Such a large mismatch of bond yields and mortgage rates means the latter will follow. The central bank is also ending quantitative easing, which had been suppressing rates. Further, they now expect to hike the overnight rates multiple times next year. All of these factors add up to tightening credit, and debt becoming more expensive. This may be a good thing, considering the high growth and real mortgage rates are negative.
Want more? Subscribe to our new YouTube channel for analysis, news, and interviews you won’t find anywhere else.